What is a Liquidity Pool in Trading?

Retail traders tend to place stop losses in predictable locations: just below obvious support, just above obvious resistance, at round numbers. These clustered orders create pools of liquidity that institutional traders can see in the order book. Institutional traders need liquidity to fill large orders without excessive slippage. They sometimes engineer moves toward these pools to trigger the stops, which generates the counterparty liquidity they need. This is why obvious stop loss placement often leads to being stopped out right before the market reverses. Liquidity pools form at equal highs (a double top pattern, where many stops sit above) and equal lows (a double bottom, where stops sit below). The more obvious the level, the larger the pool, and the more likely it is to be targeted.